Business surveys suggest that conditions in manufacturing worsened again in August. The Cabinet Office’s survey-based index of manufacturing conditions fell to its lowest level since 2011, when the country was recovering from the Great East Japan Earthquake. The output component of the manufacturing PMI also points to a significant contraction in manufacturing output. So far, this deterioration in business confidence hasn’t fed through to the hard data – industrial production rose 1.3% m/m in July. And overall, we are expecting only a small decline in industrial output this quarter. But global growth should continue to slow and next month’s sales tax hike will dent domestic demand. As such, a sharp contraction in industrial production is likely in Q4. We think the weakness in foreign and domestic demand will persist into most of next year, so we aren’t expecting manufacturing conditions to improve any time soon.
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